What does target costing mean?

What is target costing?

In today's highly competitive business world, companies must constantly look for ways to optimize their costs while developing products that meet the needs of their customers. One method that helps with this is target costing. This concept is particularly important in the early stages of product development, as it provides clear guidance on how much a product should cost in order to be successful on the market. But what exactly is behind this term and how can it help a company to achieve its goals?

Target costing is a cost management strategy that aims to minimize the total life cycle costs of a product from development to production. The basic idea is simple: instead of calculating costs after a product has been developed, target costing determines the acceptable price for a product in advance, based on market analyses and customer requirements. The target profit margin and distribution costs are then deducted from this price to determine the maximum permissible production costs.

What are the advantages of target costing?

Target costing offers companies a number of advantages that help to strengthen their market position and optimize their internal processes. A key advantage of target costing is its consistent customer focus. As the method is based on customers' needs and willingness to pay, it ensures that the products developed are not only marketable, but also correspond to customers' value expectations. This means that companies can offer products that actually meet the requirements of the market.

Another key advantage is cost control right from the start. Defining a target cost framework at an early stage prevents a product from generating unexpectedly high costs later on in development or production. This minimizes the risk of developing a product that is not profitable due to excessive costs. In this way, companies can identify and avoid cost traps at an early stage.

Target costing also promotes internal collaboration within the company. As different departments have to work closely together to achieve the target costs, communication and efficiency are improved. This cross-departmental cooperation helps to ensure that everyone involved is working towards a common goal, resulting in a smoother and more effective development process.

Target costing also enables companies to gain a competitive advantage. By being able to offer products at competitive prices, they position themselves better against their competitors. Companies that successfully apply target costing are able to deliver high-quality products at competitive prices, which helps them to increase their market share.

In the long term, target costing also helps to reduce costs. By continuously applying this approach in different product cycles, companies can continue to optimize their production processes and reduce overall costs. This long-term focus on increasing efficiency and reducing costs helps companies to remain profitable in the long term and secure their competitiveness.

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